Pension Death Benefit to paid into deceased's estate - will this make it subject to Inheritance Tax?

CalvinHobs

My long-term partner died earlier this year - she was under 75 and had a private Defined Contribution pension. The scheme trustees have decided not to pay the death benefit lump sum to the nominated beneficiary but propose to pay it into the estate instead. The total value of the estate is above the nil-rate band of £325,000 (before this lump sum payment).

Yesterday, I called the pension company and asked if this means IHT will be payable on the death benefit. After querying it with their technical team the helpdesk advisor told me "Yes - it will be subject to IHT if the value of the estate is above the £325,000 threshold".

Initially, I took their answer to be correct. However, looking at the relevant form - IHT409 - it makes me question if it really is correct. These are the specific questions on the IHT409 form:

11. Could the deceased, right up to their death, have signed a binding ‘nomination’ which obliged the trustees of the pension scheme to make a payment to a person nominated by the deceased?
No / Yes
If Yes, go to question 15

12. Was it at the trustees’ discretion to choose who should receive the death benefit?
No / Yes

15. Amount of the death benefit payment
 £____________
 Include this amount in form IHT400, box 56, unless you answered Yes to question 12

My answers to the above questions are:
11 - No
12 - Yes
15 - Leave blank and the amount is not carried to form IHT400

From the above, it seems the question of whether or not death benefit is taxable hinges on Q12, i.e. as it was at the trustees' discretion who should receive the death benefit then it is not subject to IHT.

Form IHT409 does not include a question asking if the death benefit was paid into the estate. Q16 does ask the name of the person who received the death benefit. If the scheme trustees' decision is accepted, this will be me, in my capacity as administrator of the estate.

I had assumed that all of the estate above the nil-rate band would automatically be subject to IHT. Reading guidance online, the term "taxable estate" is used. So my question is: In this case, is pension death benefit part of the taxable estate or not?

Thanks in advance.

Marcon

CalvinHobs said:

My long-term partner died earlier this year - she was under 75 and had a private Defined Contribution pension. The scheme trustees have decided not to pay the death benefit lump sum to the nominated beneficiary but propose to pay it into the estate instead. The total value of the estate is above the nil-rate band of £325,000 (before this lump sum payment).

Yesterday, I called the pension company and asked if this means IHT will be payable on the death benefit. After querying it with their technical team the helpdesk advisor told me "Yes - it will be subject to IHT if the value of the estate is above the £325,000 threshold".

Initially, I took their answer to be correct. However, looking at the relevant form - IHT409 - it makes me question if it really is correct. These are the specific questions on the IHT409 form:

11. Could the deceased, right up to their death, have signed a binding ‘nomination’ which obliged the trustees of the pension scheme to make a payment to a person nominated by the deceased?
No / Yes
If Yes, go to question 15

12. Was it at the trustees’ discretion to choose who should receive the death benefit?
No / Yes

15. Amount of the death benefit payment
 £____________
 Include this amount in form IHT400, box 56, unless you answered Yes to question 12

My answers to the above questions are:
11 - No
12 - Yes
15 - Leave blank and the amount is not carried to form IHT400

From the above, it seems the question of whether or not death benefit is taxable hinges on Q12, i.e. as it was at the trustees' discretion who should receive the death benefit then it is not subject to IHT.

Form IHT409 does not include a question asking if the death benefit was paid into the estate. Q16 does ask the name of the person who received the death benefit. If the scheme trustees' decision is accepted, this will be me, in my capacity as administrator of the estate.

I had assumed that all of the estate above the nil-rate band would automatically be subject to IHT. Reading guidance online, the term "taxable estate" is used. So my question is: In this case, is pension death benefit part of the taxable estate or not?

Thanks in advance.

Refer the pension company to https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm17051 and ask why they think it should be subject to IHT.

CalvinHobs

Marcon said:

Refer the pension company to https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm17051 and ask why they think it should be subject to IHT.

Thank-you for the link - I had not found that when searching online. I sent an email to the pension company, including the link. I suspect their response will be "We are unable to offer tax advice" or similar. We shall see...

Marcon

CalvinHobs said:

Marcon said:

Refer the pension company to https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm17051 and ask why they think it should be subject to IHT.

Thank-you for the link - I had not found that when searching online. I sent an email to the pension company, including the link. I suspect their response will be "We are unable to offer tax advice" or similar. We shall see...

If they do, go back and point out that they have already offered tax 'advice' by telling you (incorrectly) that the payment would be subject to IHT, and you aren't asking for advice - just an explanation of how their view on the IHT position reconciles with HMRC's take on matters.

Marcon

CalvinHobs said:

My long-term partner died earlier this year - she was under 75 and had a private Defined Contribution pension. 

Should have added - age isn't relevant for IHT purposes.

If she'd been over 75 the payment (whether to the estate or otherwise) would potentially be subject to income tax.

CalvinHobs

Marcon said:

CalvinHobs said:

My long-term partner died earlier this year - she was under 75 and had a private Defined Contribution pension. 

Should have added - age isn't relevant for IHT purposes.

If she'd been over 75 the payment (whether to the estate or otherwise) would potentially be subject to income tax.

Ah, I see - thanks for clarifying. The guidance I read said only that death benefit lump sums where the deceased was 75 or over are taxed. It did not specify income tax - so I thought they were referring to IHT.

Confirmed on the .gov website here:
Tax on a private pension you inherit

CalvinHobs

For anyone looking for a definitive answer to this in future, I found the following guidance online:

Deceased’s estate has a right to death benefits

Any death benefits payable to the deceased’s estate or personal representatives, as of right at the date of death, form part of the deceased’s estate for IHT purposes. 

To avoid a charge under this provision, it is important to make sure that the trustees/Scheme Administrator have discretion over the payment of death benefits. This will avoid the death benefits being treated as part of the deceased’s estate even if the trustees exercise their discretion in favour of the deceased’s estate. 

Source: Pension-death-benefits-inheritance-tax-29.08.2023.pdf (riskassured.co.uk)


I also called the HMRC IHT helpline and put this question to them. HMRC confirmed the above, i.e. where the pension scheme administrator/trustees have discretion as to whom the death benefit is paid, then it is not subject to IHT even if they decide to pay it to the estate.

This guidance is true for tax year 2024-25. There is no reason to think it will change in future but best to check with HMRC on current IHT rules. 

Hamster700

Hi CalvinHobs, can i ask why the pension company would choose to pay into the estate? I've read that's quite unusual if there's a nominated beneficiary?

CalvinHobs

Hamster700 said:

Hi CalvinHobs, can i ask why the pension company would choose to pay into the estate? I've read that's quite unusual if there's a nominated beneficiary?

It was because, when my late partner took out the policy (in the 1980s) she nominated her parents as the benificiaries. I presume she forgot to update this - her father died years ago and her mother is now in her mid 90s.

Her mother is still very astute and said she did not want to accept the payment as it would become subject to IHT when she herself dies. I understand the mother's estate will definitely be above IHT nil rate band.

So her mother requested the pension provider to pay the death benefit to the beneficiaries named in my partner's will. The scheme trustees decided to pay it to her estate, instead. They did not give a reason but I suspect their view was that paying it to beneficiaries of the will was too complex, i.e. too "messy" for want of a better word.

Once I received confirmation from HMRC that the payment was not subject to IHT, I had no reason to challenge the decision of the scheme trustees: As executor, I distributed the lump sum to the beneficiaries of the will myself - so we ended up with the desired outcome - just by a different route.

poseidon1

CalvinHobs said:

Hamster700 said:

Hi CalvinHobs, can i ask why the pension company would choose to pay into the estate? I've read that's quite unusual if there's a nominated beneficiary?

It was because, when my late partner took out the policy (in the 1980s) she nominated her parents as the benificiaries. I presume she forgot to update this - her father died years ago and her mother is now in her mid 90s.

Her mother is still very astute and said she did not want to accept the payment as it would become subject to IHT when she herself dies. I understand the mother's estate will definitely be above IHT nil rate band.

So her mother requested the pension provider to pay the death benefit to the beneficiaries named in my partner's will. The scheme trustees decided to pay it to her estate, instead. They did not give a reason but I suspect their view was that paying it to beneficiaries of the will was too complex, i.e. too "messy" for want of a better word.

Once I received confirmation from HMRC that the payment was not subject to IHT, I had no reason to challenge the decision of the scheme trustees: As executor, I distributed the lump sum to the beneficiaries of the will myself - so we ended up with the desired outcome - just by a different route.

In the circumstances the pension provider acted appropriately in paying the benefit to the estate, but it was entirely outside their remit to comment on the tax outcome of doing so ( they are not tax advisers).

Sadly  from 2027 when DC pensions specifically become liable to IHT, it appears such providers will be forced to attain  proficiency in IHT matters ( and presumably have a view thereon) unless they choose to outsource this function to specific tax professionals.